What Are Different Ways To Borrow Money For An Emergency?

Posted on February 18, 2021 in Money

In life, it is just a matter of time before an emergency will appear out of nowhere and severely disrupt even the most prepared person’s life. 

No matter how hard we may try to avoid them, sooner or later, an emergency will strike, and getting past it can prove to be challenging. The first resource for battling against an emergency is money. Quite simply, the more you have, the easier the battle will be. But what do you do if you need money fast? 

Taking out an emergency loan can be quite a risky endeavor. Without much time for due diligence and research, some people enter into awful loans that end up being worse than the emergency was in the first place. It is very critical, even in the case of an emergency, to take the time to read and understand the terms of the loan before agreeing to it. 

There are many predatory loans that should be avoided at all costs, such as payday loans and auto title loans. These should be considered the very last options for loans. 

Here is a list of some of the better choices for anyone in need of an emergency loan.

Personal Loans

Personal loans are probably the best overall option in the long run for borrowing money for emergencies. Personal loans can be found in banks, credit unions, and a large variety of online lenders so there will be plenty of options to choose from. 

The basic way they will work is that a loan amount is requested (let’s say $5,000) with a loan term of 36 months. Depending on the borrower’s credit score, the interest rate will be higher or lower but let’s say, for example, it’s 10%. The interest rate will be added into the total amount to be repaid and broken down into monthly installments. So for our example of a $5,000 loan, the monthly installment payment would end up being just about $152.77 for 36 months. 

One potential downside of a personal loan is that credit score will play an enormous factor in a personal loan’s terms and conditions. This is because personal loans are considered unsecured loans, which means that nothing will be put up as collateral if the loan is not repaid on time. However, anyone with an average or above credit should look into a personal loan first. 

Another potential issue for this loan type is that it may take a few days from filling out the application to the loan being reviewed then accepted. After these events, it still may take a little bit more time before the money makes its way into your bank account. 

If you cannot afford to wait two to five business days for the loan, this option may not be the best.

Home Equity Loan

Anyone that has a mortgage and has been making payments on that mortgage has home equity. Home equity is the difference between the market value for a home and the amount of money still owed on the property. 

An example would be a home valued at $250,000 but has a mortgage of $150,000 would have an equity of $100,000. Now, this loan would only apply to homeowners, so it is not for everyone, but it will probably be the best option for a homeowner. 

The reason being that the interest rate of a home equity loan will almost certainly be the lowest found on this list. This is because a home equity loan is considered a secured loan since the home would technically be offered as collateral. If repayments are not made, then the home could be lost to foreclosure. 

Another downside is that all the time and money put into paying off the mortgage and creating that equity would effectively be washed away, which can be emotionally deflating. Still, this loan is one of the better options in times of emergency if it’s applicable to you.

New Credit Card

Taking out a new credit card to create new funds during an emergency can be a little bit riskier of an option, but if done correctly may end up being the cheapest one. 

Most credit cards offer all kinds of different promotional deals to get new customers to sign up. One of the more common deals offered is no interest payments for X amount of months. The terms and conditions will vary between credit card companies and will depend on credit scores. However, if you can find a deal with a 0% interest rate for the first 12 months with a maximum credit amount of $5,000, you will essentially get a $5,000 loan with no interest rate or monthly minimum payments. 

Now there are potential consequences for this option, and that is why it’s found lower on the list. A credit score is affected by something called the credit utilization ratio. This basically means the more credit being used than, the more the score will be impacted. Credit utilization accounts for 30% of a credit score, so this is a big part of credit. An excellent credit utilization ratio is about 10%, but it’s a good rule to keep it under 30% if possible. Anything over that and your score will certainly be affected. 

Also, credit cards have notoriously high interest rates, so if the loan were not to be repaid by the time the promotional period ended, it may end up being wildly more expensive than some loan alternatives and be much worse from a credit standpoint. 

This option is risky, but if you have a very strict plan to repay, it could save money long term.

Credit Card Advance

Just about every major credit card company offers the opportunity to take out a cash advance. This option allows the credit card owner to borrow cash based on their available credit balance on the card. If you need cash (as opposed to using the credit card in a traditional way) then this option will be the way to go. 

However, there will be quite a few issues that will arise going down this path. Interest rates for credit cards are generally pretty high, but they also come with grace periods. If the balance is paid off within the month, then interest will not start being charged. In the case of a credit card advance, not only is the grace period suspended (so interest is applied immediately), but the interest rate will often be even higher than normal, and there may even be fees applied as well. 

Friends And Family

No one enjoys asking their loved ones for help, especially when it comes to finances. However, when dealing with emergencies, it may be the best way to get through. Friends and family most likely will not credit checks, so that will not impact the terms of the loan and interest rates may not even be applied to these loans. 

A potential downside is that money can do a lot of harm to even some of the strongest relationships, so the risks here could end up doing damage other than just financially. It is important to get everything in writing for the loan terms and set up as many details as possible before any money exchanges hands. How long before the debt needs to be repaid? Will there be interest? How much? Are alternatives to money such as doing yard work or home repairs acceptable? What exactly and how many times? 

The conditions of these loans can be whatever the two parties agree to but enter them with caution. A little bit of financial trouble is a much better alternative than losing a loved one because a loan has defaulted.

The Takeaway  

It is just a matter of time before an emergency will impact your life, and almost certainly, money will be the quickest way to get through it. Avoiding predatory loans and securing loans that have your best interest in mind is critical, so be sure to read all of the fine print before signing anything. 

Borrowing money can be just as stressful as the emergency that the money is needed to repair. With so many options available and so many predatory terms, it can be challenging to navigate. 

It’s important to look into the future when considering loans. There may be an emergency now, but if a predatory loan is chosen, you could find yourself in another, possibly worse, emergency down the road.

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